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Gross Domestic Product

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Presentation on theme: "Gross Domestic Product"— Presentation transcript:

1 Gross Domestic Product
What is gross domestic product (GDP)? How is GDP calculated? What is the difference between nominal and real GDP? What are the limitations of GDP measurements? What factors influence GDP?

2 Introduction to Macroeconomics

3 What Is Gross Domestic Product?
Economists monitor the macroeconomy using national income accounting. A system that collects statistics on: production, income, investment, and savings.

4 What Is Gross Domestic Product?
Gross domestic product (GDP) - the dollar value of all final goods and services produced within a country’s borders in a given year. Does not include the value of intermediate goods (goods used in the production of final goods and services).

5 Calculating GDP The Expenditure Approach Totals annual expenditures on four categories of final goods or services. 1. Consumer goods and services 2. Business investment in goods and services 3. Government goods and services 4. Net exports or imports of goods or services.

6 Consumer goods include:
Calculating GDP Consumer goods include: Durable goods, goods that last for a relatively long time like refrigerators, and Nondurable goods, or goods that last a short period of time, like food and light bulbs.

7 Calculates GDP by adding up all the incomes in the economy.
Calculating GDP The Income Approach Calculates GDP by adding up all the incomes in the economy.

8 Real GDP is GDP expressed in constant, or unchanging, dollars.
Real and Nominal GDP Nominal GDP is GDP measured in current prices. Does not account for inflation. Real GDP is GDP expressed in constant, or unchanging, dollars. See chart figure 12.3, page 304.

9 Limitations of GDP GDP does not include: 1. Nonmarket activities
Goods and services that people make or do themselves. 2. Transfer of financial assets Purchase or sale of stock, corporate mergers 3. Negative externalities Unintended economic side effects, such as pollution.

10 Limitations of GDP GDP does not include:
4. Government transfer payments Social security, subsidies, gov’t pensions 5. Underground economy Economic activity which never reported to the government. 6. Quality of life Include leisure time, pleasant surroundings, and personal safety.

11 Gross National Product (GNP)

12 Other Income and Output Measures
Gross National Product (GNP) GNP market value of all goods and services produced by Americans. Net National Product (NNP) NNP output made by Americans minus adjustments for depreciation. (loss of value of capital equipment from wear and tear.

13 Other Income and Output Measures
National Income (NI) NI - NNP minus sales and excise taxes. Personal Income (PI) PI - total pre-tax income paid to U.S. households. Disposable Personal Income (DPI) DPI - personal income minus individual income taxes.

14 Key Macroeconomic Measurements
Measurements of the Macroeconomy + = Gross Domestic Product Gross National Product income earned outside U.S. by U.S. firms and citizens income earned by foreign firms and foreign citizens located in the U.S. Gross National Product depreciation of capital equipment = Net National Product Net National Product National Income sales and excise taxes = • firms‘ reinvested profits • firms‘ income taxes • social security + other household income = National Income Personal Income individual income taxes = Personal Income Disposable Personal Income Figure 12.4, page 306

15 Factors Influencing GDP
Aggregate Supply Aggregate supply - total amount of goods and services in the economy available at all possible price levels. As price levels rise, aggregate supply rises and real GDP increases.

16 Factors Influencing GDP
Aggregate Demand Aggregate demand - amount of goods and services that will be purchased at all possible price levels. Lower price levels will increase aggregate demand as consumers’ purchasing power increases.

17 Factors Influencing GDP
Aggregate Supply/Aggregate Demand Equilibrium By combining aggregate supply curves and aggregate demand curves, equilibrium for the macroeconomy can be determined.

18 What is a business cycle? What keeps the business cycle going?
Business Cycles What is a business cycle? What keeps the business cycle going? How do economists forecast business cycles? How have business cycles fluctuated in the United States?

19 What Is a Business Cycle?
A business cycle is a macroeconomic period of expansion followed by a period of contraction. Four main phases of the business cycle: expansion, peak, contraction trough

20 GDP Growth

21 GDP Growth

22 Phases of the Business Cycle
Expansion An expansion - period of rise in real GDP. Economic growth is a steady, long-term rise in real GDP. Peak Peak - GDP stops rising, height of economic expansion.

23 Phases of the Business Cycle
Contraction Contraction - a period of decline marked by a fall in real GDP. Recession - a prolonged economic contraction. Depression - long or severe recession.

24 Phases of the Business Cycle
Contraction Trough Trough - the lowest point of economic decline, when real GDP stops falling.

25 What Keeps the Business Cycle Going?
Variables that affect business cycles: 1. Business Investment During expansion firms invest in new plants and equipment. This creates new jobs and furthers expansion. In a recession, the opposite occurs.

26 What Keeps the Business Cycle Going?
Variables that affect business cycles: 2. Interest Rates and Credit When interest rates are low, businesses and consumers spend more. When interest rates climb, they spend less. Unemployment rises.

27 What Keeps the Business Cycle Going?
3. Consumer Expectations Forecasts of an expanding economy often fuel more spending, while fears of recession tighten consumers' spending.

28 What Keeps the Business Cycle Going?
4. External Shocks External shocks, such as disruptions of the oil supply, wars, or natural disasters, greatly influence the output of an economy.

29 Forecasting Business Cycles
Economists try to predict changes in the business cycle. Leading indicators are key variables used to predict a new phase of a business cycle. Ex. - stock market performance, interest rates, and new home sales.

30 Leading indicators Average Workweek
Initial Claims for Unemployment Insurance New Orders for Consumer Goods Vendor Performance New Orders for Capital Goods Building Permits for Houses Stock Prices Money Supply Interest-Rate Spread Consumer Expectations

31 Business Cycle Fluctuations
The Great Depression GDP fell by almost one third, and unemployment rose to about 25%. Ended with WWII. Later Recessions In the 1970s, an OPEC embargo caused oil and gas prices to rise, led to recession in the 70s – early 80s.

32 Business Cycle Fluctuations
U.S. Business Cycles Brief recession in 1991, the U.S. economy grew steadily during the 1990s Economy moved more toward services.

33 GDP Growth

34 How do economists measure economic growth? What is capital deepening?
How are saving and investing related to economic growth? How does technological progress affect economic growth?

35 Measuring Economic Growth
The basic measure of a nation’s economic growth rate is the percentage change of real GDP over time. GDP and Population Growth Real GDP per capita is the best measure of a nation’s standard of living.

36 Measuring Economic Growth
GDP and Quality of Life excludes many factors that affect the quality of life.

37 Important source of growth in modern economies.
Capital Deepening Capital deepening - process of increasing the amount of capital per worker is called. Important source of growth in modern economies. Physical capital - more equipment. Human capital - training and education.

38 The Effects of Savings and Investing
Savings rate - proportion income spent to income saved. When consumers save or invest, money becomes available for firms to borrow. In the long run, more savings will lead to higher output and income, raising GDP and living standards.

39 The Effects of Technological Progress
Increase in efficiency gained by producing more output without using more inputs. Innovation - new products and ideas boost GDP and business profits. Scale of the Market - Larger markets provide more incentives for innovation.

40 The Effects of Technological Progress
Education and Experience Increased human capital makes workers more productive. Educated workers can use new technology.

41 Other Factors Affecting Growth
Government Government can affect growth by raising or lowering taxes. Use of tax revenues also affects growth: funds spent on public goods increase investment, while funds spent on consumption decrease net investment.

42 Other Factors Affecting Growth
Foreign Trade Trade deficits can sometimes increase investment and capital deepening if the imports consist of investment goods rather than consumer goods.

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